Ideas to minimize credit risk and make losses more palatable to management By Michael C. Dennis MBA,
CBF

Regardless of the industry you are in, credit risk management is
a difficult, stressful and inexact process. As a consequence, most
of us hope for the best and expect the worst after making tough credit
decisions throughout our careers.

These are some ideas to minimize credit risks and make the losses
that occur more palatable to senior management:

Inform management of potential credit risks. Try to define or
describe the severity of the risk rather than simply describing
the customer account as high risk.

When you as credit manager feel that the risk of doing business
with a particular customer is too high, but you recognize that
the customer in question is strategically important to your company
involve senior management in the decision about whether or not
to continue to extend credit to that company, under what terms
and conditions, and at what credit limit.

Keep management informed about the tools used to evaluate credit
risk.

When appropriate, ask management to approve or at least to comment
on the risk assessment process.

Depending on the size and potential risk of a specific decisions
being made, it may be necessary or appropriate to request their
approval for the credit limit and terms required by the customer.

As problems emerge, give senior management a 'heads up.' The
only thing worse than the credit manager delivering bad news about
a customer is when the news is a surprise or a shock to senior
management.

Rate credit risks as being high, medium or low risk based on
both the probability of a problem and the potential size of the
problem if it occurs.

For each 'problem' account that you identify, consider risk
mitigation strategies such as reducing the credit line, shortening
the credit terms, requiring security, or at the very least flagging
the account in question for more prompt follow up and for more
frequent credit reviews.

If the risk is serious, try to develop contingency plans that
will reduce the impact on your company if payment default does
occur.

Use your education, experience, intuition, and access to outside
sources of information, and job skill to identify and track potential
problem accounts in order to avoid serious delinquencies and payment
defaults.

One final thought: No matter how carefully the credit department
does its job, there will be times when the company's business needs
take precedent over credit risk management considerations. This usually
results in an override of the credit decision. Keep in mind, this
is not a criticism of the credit department - it is an economic reality
for many businesses. If and when your attempts to limit credit risk
and control delinquencies are thwarted by decisions made by senior
management, it is important not to take it personally. In fact, the
best approach is to acknowledge management's instructions [preferably
in writing] and assure senior management that you will do two things:
[1] that you will do your best to manage collections carefully, and
[2] you will promptly inform them if and when collection problems
arise involving management override accounts.